USD/JPY drops to multi-day low, eyes mid-114.00s ahead of US ISM PMI

• USD/JPY witnessed heavy selling on Tuesday and drifted lower for the third successive day.
• Retreating US bond yields kept the USD bulls on the defensive and exerted some pressure.
• Investors now look forward to the US ISM Manufacturing PMI for a fresh trading impetus.

The USD/JPY pair continued losing ground through the mid-European session and dropped to a three-day low, around the 114.60 region in the last hour.

The ongoing retracement slide in the US Treasury bond yields dragged the US dollar further away from the highest level since July 2020 touched in the aftermath of a more hawkish FOMC last week. This, in turn, was seen as a key factor that exerted downward pressure on the USD/JPY pair for the third successive day on Tuesday.

Bearish traders further took cues from a weaker tone around the US equity futures, which tends to benefit the safe-haven Japanese yen. The downward momentum took along some short-term trading stops near the key 115.00 psychological mark. Hence, the fall could also be attributed to some technical selling below the said handle.

The USD/JPY pair has now retreated over 100 pips from the 115.70 area, or a near three-week high set on Friday and erased around 50% of last week's strong recovery move from a one-month low. Some follow-through selling will be seen as a fresh trigger for bearish traders and set the stage for a further near-term depreciating move.

That said, growing market acceptance that the Fed will tighten its monetary policy at a faster pace than anticipated should act as a tailwind for the buck and limit losses for the USD/JPY pair. In fact, the money markets have fully priced in an eventual Fed liftoff in March and expect five quarter-point rate hikes by the end of 2022.

Market participants now look forward to the release of the US ISM Manufacturing PMI. This, along with the US bond yields, might influence the USD price dynamics and provide some impetus to the USD/JPY pair. Traders will further take cues from the broader market risk sentiment to grab some short-term opportunities.

Technical levels to watch